After a spring surge, lumber prices reached a one-year low in August. Will less expensive building materials bring down home prices?
Homebuyers are hoping that falling lumber prices will bring down home prices. They may need to curb their expectations.
Random Length Lumber Futures have been falling since hitting a peak of $1,686 per thousand board feet in early May. By early August, lumber prices reached their lowest level in over a year at nearly a quarter of the peak May price.
Meanwhile, the four-week rolling average national median home-sale price has been increasing since mid-February. It hit a record high $364,000 in late July, where it remained into early August.
Lumber prices have a direct impact on home building costs, but the correlation between lumber prices and home prices is more convoluted. Three months after the lumber bubble burst, there is little sign that home prices will follow.
Here are three reasons why.
Lumber prices are “sticky”
Supply chain issues and price fluctuations take time to smooth out. Lumber futures began falling in May, but builders were still paying record high prices well into July.
That’s because lumber dealers were still selling inventory they paid high prices for at the mill. And neither the mill nor the dealers wanted to sell that inventory at a loss -- especially while demand is high.
And even after the lumber reaches the builder, it takes on average six to seven months to build a house. Lumber that builders purchased at peak price in July 2021 won’t show up on the consumer market as a home until January or February 2022.
It takes time for the inflated inventory to work its way through the entire supply chain. Unless one part of the chain is willing to take a loss, which is rare, then the cost is passed all the way from top to bottom.
Even after high-priced lumber works its way through the supply chain, home builders may not drop their asking prices right away.
KB Home Chief Executive Jeffrey Mezger told the Wall Street Journal he expects to take lumber savings “to margin” rather than pass it on to consumers. This is typical during times of economic growth combined with inflation.
Home prices have been rising all year and demand is still strong. Instead of reducing home prices to reflect falling lumber prices, builders can still sell at the current price point and make a larger profit.
Lumber isn’t the only home building material facing price increases in 2021. In fact, it’s one of the few that’s normalizing.
Residential construction inputs minus food and energy are up 13% from last year after an average increase of 1.2% per year from 2015 to 2019.
- The price of steel products saw four double-digit monthly increases in 2021
- In July, gypsum products used for drywall were up 15.8 percent over last year
- Concrete prices remained steady in July after a 1.1% increase in June
Not only will these price hikes take time to correct and work through the supply chain, there’s no guarantee that builders will drop listing prices once they have.
Builders are also battling over skilled labor and building lots -- neither of which are easy to come by.
Until most or all of these issues are resolved and housing supply is able to catch up with demand, building conditions will continue to put upward pressure on home prices.